55—Lever #5: Interest Paid (Part Two—Your Credit Score)
Don't worry about it too much
According to Equifax, my credit score is 768. Not bad, right? Well, based on data compiled by the Motley Fool,
The average credit score is 715.
Older Americans have higher average credit scores. The average credit score for baby boomers is 746, while the average credit score for millennials is 691.
24% of Americans have an "exceptional" credit score of 800 or above.
Based on that data, my score is only slightly higher than that of others my age, and below the 24% of Americans with an “exceptional” score of 800 or above. So, I’ve been wondering, “Why isn’t my score exceptional. Why is it 768 out of 850? I have no debt except for the credit card expenses I incur each month to earn 2% cash back, which I have paid back on time every month for many years.”
According to Equifax, it’s because I “have too few loans, or maintain a very low balance on the loans I have.” Seriously, how is that not a good thing? Why am I not ‘super-exceptional’? Almost 30% of the population has a better FICO score than I do. How can this be? I have a 40-year history of good credit, always pay my bills on time, and once I pay off my credit card each month, I have zero debt. Don’t I deserve a “spectacular” (better than exceptional) rating?
If it sounds like I’m obsessed with my credit score, I’m not. At this point in my life, it actually doesn’t matter very much to me. But what about you? According to Experian, the average FICO score for Gen Z is 680. If that’s you, that puts you 35 points short of the national average credit score of 715, but it lands you in the ‘good’ FICO Score range, which starts at 670. You may think that’s not too bad, and actually, it isn’t—good is good; actually, ‘good’ is ‘good enough.’
So, perhaps the most important question is, "Why would I even care about my credit score, and why would you?” So what if I thought I had a good credit score, but it turns out it's not ‘exceptional.’ Others have a long credit history and pay their bills on time as well. However, when it comes to what matters the most, a good to very good grade is all it takes to get approved to rent an apartment, or the best rate on a credit card, car loan, or mortgage, if you must borrow.
I don’t have an extremely high credit score. I’m OK with that because a high credit score is not necessary to get the best rate on a loan. A slightly above average score will do just fine. But then, I don’t plan to take out any loans, so the whole thing is kind of moot for me, though it may not be for you.
Having a good credit score can sometimes be helpful, especially when shopping for an apartment or a mortgage. Although credit reporting agencies most often use credit card purchases and payments to evaluate your creditworthiness (which is why Dave Ramsey refers to them as “debt reports”), there are other ways to build good credit. Paying your bills on time and repaying your student loans are the best.
Some people try to build credit by taking out a “credit builder loan.” When you take out that type of loan, the bank deposits the full amount — typically between $300 and $1,000 — into a secure account. Unlike a regular loan, you can’t access the money right away. Instead, you make fixed monthly payments, and after paying it off, you get your money back plus any interest earned. (In a way, this works more like a forced savings account than a loan.)
Some people think that paying your rent on time gives you a better credit rating. Doing that is a good thing for a lot of reasons, but traditional credit score calculations don't include them. However, it's possible to get your rent payment history included in your credit reports. There are third-party services, such as Rental Kharma (those are two words you don’t normally see together), that will report your rent payments to the credit bureaus.
However, being reported to the bureaus doesn't guarantee that it will be considered by the credit score algorithm. Whether it helps your score depends on the version of the score that the bureau uses. But it's worth a try. Begin by asking your landlord if they use or would be willing to use one of the services to report your rent. Note: These services are not free. Read the terms so you know how much you'll have to pay every month.
But regardless, if you have a limited credit history, or your rating isn’t spectacular, the next time you hear how your credit score is super-important, maybe from some talking head on TV, remember this: Yes it is important for people whose scores are below average, as in D or F grades, but if your credit score is above average, don’t worry about it.
Apply for a credit card if you want one. It doesn’t matter whether the card reports a credit limit or not. It could only be for $500. If you no longer want a card, cancel it. It doesn’t matter whether it’s the oldest one or not. Just live your life as you know God wants you to, including what kinds of debt and how much you should take on, and don’t worry about it. You certainly don’t need to arrange your life to appease the credit score formula and the credit card and loan companies out there. And by all means, don’t take on a bunch of unnecessary debt so that you have to raise your credit rating. Remember: good is good enough.
If you have a good credit score, congratulations. But remember this: A good credit score and a bank's willingness to extend a large amount of credit to you doesn’t mean you can truly afford the payments. They know your credit score, but they don’t know your spending habits. All they have is a score on a piece of paper that a computer algorithm spit out. So don’t confuse a large credit line with your ability to pay it back; that would be a huge mistake.
For reflection: Some people are obsessed with their credit score. It’s one of the many ways we seek validation–chasing numbers that make us feel secure, approved, or successful. But while financial responsibility is wise, and having good credit if you need to borrow is a good thing, a three-digit score doesn’t measure our true worth. We are more than our credit history. As Christians, our identity is rooted not in what lenders think of us, but in what God says about us.
Verse: “But the LORD said to Samuel, “Do not look on his appearance or on the height of his stature, because I have rejected him. For the LORD sees not as man sees: man looks on the outward appearance, but the LORD looks on the heart”
(1 Samuel 16:7, ESV).